How I plan to invest my ISA allowance in 2024

The festive season may have drawn to a close, but ISA season is now zooming into focus.

Taking place between February and the start of the new tax year in April, ISA season is the period where investors scramble to maximise their tax-free allowances before they’re lost for good; you can’t roll over any unused ISA allowance to future tax years, sadly.

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Making the most of your ISA before April carries some extra importance this time around. That’s because the capital gains tax (CGT) and dividend allowances will halve to £3,000 and £500, respectively, from 6 April, meaning investments held outside ISAs and pensions could be hit with larger tax bills in the future.

So, as the new tax year edges closer, I’m starting to consider the best way to use my ISA allowance for 2023-24 – and thinking ahead to 2024-25, too.

But before I commit any savings, there are several questions that I need to answer: how much to invest? Which ISA type should I choose? And once I’ve chosen a suitable ISA wrapper, how should I invest?

In a previous article, I shared my financial goals for 2024, and these will inform my investment decisions. So, here’s how I plan to go about it. I also share two of the funds that I intend to select.

Question 1: how much should I invest?

The first thing to say is that I’m not in the 15% of investors who can afford to max out their ISA allowance every year. It would be great to have £20,000 spare after my living expenses – both essentials and discretionary – are paid for, but sadly that’s not the case. I also prioritise pensions over ISAs when saving for retirement, to benefit from generous employer contributions and up-front tax relief.

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Still, I recognise that it’s crucial to use as much of my ISA allowance as I can to protect any gains and income from HMRC, so I plan to add a modest lump sum between now and April and beef up my regular contributions at some point in the following tax year. The £20,000 ISA allowance has remained frozen for several years now, and while an increase is long overdue, the government could decide to reduce it at any point - albeit this is unlikely.

Question 2: which type of ISA should I choose?

As things stand, there are six ISAs to choose from: Stocks and Shares, Cash, Innovative Finance, Junior and Help to Buy (though this is not available to new subscriptions). It’s imperative that I select the right one to make sure my goals don’t suffer, so let’s narrow things down.

I’m the wrong side of 40 and don’t have an existing Lifetime ISA, which means I’m too old to qualify - so can immediately rule that one out.

As I don’t have any children, the Junior ISA is also a no-go, and as I’m not particularly keen on peer-to-peer lending – partly because my knowledge of the area is a bit thin – the innovative finance ISA is not for me.

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That leaves me with just two: Stocks and Shares, and Cash.

In the past, the bulk of my ISA holdings have been held in the Stocks and Shares version. I’ve usually only used a Cash ISA to hold emergency funds.

But due to personal circumstances, I have split allocations between the two for 2023-24.

I’ve saved more into Cash ISAs than usual this year. That’s because I plan to move property soon and need sufficient accessible cash to pay for things such as stamp duty, valuations, etc. Keeping this money in the market could be risky given the short time frame, so I’d rather play safe. It also means I don’t need to disturb my existing Stocks and Shares ISA holdings when the time comes to move.

When it comes to long-term investing, I believe the market offers a better opportunity for growth. Therefore, I’m only holding enough in my Cash ISA to cover home-moving expenses and a further six months’ expenditure as a financial safety net. As I now have enough saved, and have plenty of ISA allowance spare, I can boost my Stocks and Shares ISA to supercharge my longer-term wealth.

Question 3: which investments should I select?

The first thing to say is that keeping costs to a minimum is essential when saving and investing for the long term. ii’s low cost, flat fee is a massive help here, as it means my platform costs will not increase as my money grows.

But I also need to consider other costs, such as fund charges, and those involved in trading.

I have flirted with the idea of trading stocks with a small part of my ISA portfolio. The fun aspect combined with the allure of outsized returns brings obvious appeal. But although it’s something I plan to do down the line, I’ve decided to stick with what I know for now.

When weighing up suitable funds, a common dilemma investors face is whether to choose passive or active. Given that few active managers frequently beat the market, the former, given the lower costs on offer, are a safer pair of hands in my opinion. I still believe that active management has a place in portfolio construction, so I’m opting for a bit of both, but with a greater tilt towards passive.

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As always, the key is to invest in the right things to support my goals and make sure my investments are diversified. I don’t plan to access my Stocks and Shares ISA holdings for at least nine years so I’m comfortable with committing 100% to equities. Plus, I have a small bond weighting in my existing ISA funds to provide a cushion.

I’m aware that I’m not reinventing the wheel here, but I think Vanguard’s LifeStrategy 100% Equity is an obvious home; it’s simple, and low cost, and takes the grunt out of fund selection. The annual ongoing charges figure (OCF) is just 0.22% and the fund offers access to thousands of stocks in both developed and emerging markets around the globe.

In the absence of a crystal ball, attempting to predict which regions will perform in both the short and long term has always been a thankless task. I feel it’s more sensible to spread my bets and not anchor too much reliance to certain parts of the world or specific sectors.

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That said, I’m also keen to be a bit speculative with a portion of this year’s allowance. The Liontrust UK Smaller Companies fund seems a good option for me. The nature of investing in smaller, higher-growth companies means performance can be racy, but I plan to use this part of my ISA portfolio to supplement my pension income in retirement. Given I have the best part of 25 years on my side, there’s plenty of time to ride out the acute ups and downs.

I’m also looking ahead to the coming tax year. I currently drip-feed a modest amount into my Stocks and Shares ISA every month, which is a great way to smooth out investment volatility. I plan to increase my monthly amount once I’ve moved home – whenever that happens – and my long-term affordability becomes clearer.

And finally, it’s important that I review any existing ISA holdings to make sure they’re still in the right place. I’m not a fan of changing funds regularly. Investing is a long-term game, so I prefer to keep faith in my current strategy wherever possible, and only switch things up if I really need to.